Almost everyone knows that in order for there to be a binding contract there must be a “meeting of the minds.” But over the past several years I have seen a very surprising number of legal disputes in which that phrase was quite poorly understood, by both parties and their experienced counsel. The governing legal principles are not brand new, but they are in some respects counterintuitive and so there is a widespread misunderstanding of when a party can back out of a deal because of fundamental differences in understandings as to an important contract term. Here are a few of the key rules.
It is well established that courts will determine the intent of the parties by looking primarily to the plain meaning of the written words, and a judge will only hear testimony about what parties now say they intended if the words are ambiguous. Powerline Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 396. In determining whether there is an ambiguity, the ordinary usage of a term will be employed in the sense that an ordinary and reasonable person would understand it. Beard v. Goodrich (2003) 110 Cal.App.4th 1031. Then, in the case of ambiguity, or when, in a particular commercial setting where an unusual phrases are employed or when common phrases are understood somewhat differently, the court may decide to hear what is called “parole evidence” (i.e., oral explanations of intent). C.C. § 1644. So-called “integration clauses” are respected, too, meaning that if the contract states that all terms are contained in the writing itself and that there are no other understandings, then an attack upon a seemingly straightforward term will face an uphill battle. And it is almost always insufficient for a party to contend that he or she did not read the clause in question or did not have it explained to them. Randas v. YMCA (1993) 17 Cal.App.4th 158. Further, even in assessing such “extrinsic” evidence of what the parties meant by an ambiguous term, the judge will give weight only to objective manifestations of intent, and not to unexpressed subjective interpretations. Brant v. California Dairies (1935) 4 Cal.2d 128. In other words, if one party has certain ideas about a clause, then it is insufficient for that party to keep them private or even to communicate them to members of his or her own negotiating team. Rather, for the judge to pay attention to expressions of intent, they must have been contemporaneously communicated to the other side, preferably in writing.
But what happens if (1) a term or a provision is ambiguous, (2) there was a fundamental misunderstanding of a term which somehow did not surface during the negotiations, but (3) the parties still signed—was there truly a “meeting of the minds” such that the contract is binding? The legal answer is somewhat counterintuitive but it is nonetheless based upon the obvious application of equitable principles. If both parties, or neither of the parties, knew that the other side had a different interpretation, then there is no binding contract. On the other hand, if one party had no reasonable basis for believing that the second party had a different understanding, but the second party had a reasonable basis for understanding that his or her interpretation was different from that of the first party, then the court will likely find that there was a meeting of the minds and will interpret the contract in accordance with the first party’s intent. See, Merced County Employees v. County of Merced (1987) 188 Cal.App.3d 662; Restatement of Contracts 2d § 201(2).
This rule essentially penalizes a party for not being straightforward, consistent with a similar legal rule that an ambiguity should be construed against the party causing it to be present. CC § 1654.
So the lesson to be learned here for parties negotiating a contract is to be sure that their interpretation of every important provision has been communicated, preferably in writing, and that they pay attention to any communication from the other side which conflicts with theirs. Further, in litigation the astute attorney deposing a signatory to a contract will focus upon whether there was or was not some available evidence during the negotiations that the other side was interpreting a proposed term differently.